President Biden has proposed relief for student loan borrowers. (iStock)
The student loan crisis was a hot topic during the 2020 presidential campaign, and many Democratic politicians are now pushing President Biden to cancel a portion of federal student loan debt for Americans.
In response to the coronavirus pandemic, Biden has proposed forgiving $10,000 in federal student loans for all borrowers, regardless of their income. Additionally, the president has said he will cancel student loans that are tuition-related for people who graduated from public colleges, historically black colleges and universities, or minority-serving institutions, and who earn less than $125,000 per year.
While nothing is set in stone, it’s natural for graduates who believe they qualify to wonder if they should continue making payments or simply wait for forgiveness.
What is student loan forgiveness?
Student loan forgiveness, or student loan debt cancellation, involves the lender — in this case, the U.S. Department of Education — canceling some or all of your debt. The federal government already has a few student loan forgiveness programs in place.
However, the new proposals from Biden and fellow Democratic politicians would be much more impactful than what’s currently available.
If you qualify for forgiveness, regardless of the amount, you’ll no longer be responsible for paying that portion of your balance. And if you’re eligible for full forgiveness, your student loan debt slate will be wiped completely clean.
The federal government only has the power to cancel student loans that it owns as a lender. This means that if you have private student loans, you don’t qualify. Even some older federal student loans held by private lenders won’t be eligible — these loans make up 12% of the federal loan portfolio in dollar terms, according to the Institute for College Access & Success.
If you have private student loans and don't qualify for student loan forgiveness, then refinancing your loans might be your best option. Head to multi-lender marketplace Credible to compare rates and lenders and find the best course of action for you.
The more sweeping proposal from Biden only applies to undergraduate loans. That said, graduate borrowers may still benefit from the $10,000 coronavirus forgiveness proposal.
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Why you should continue paying your student loans
If student loan forgiveness is on the horizon, it may be tempting to stop making payments to maximize your forgiveness. But there are a couple of reasons to reconsider that approach.
First, though the Democratic Party now controls the House of Representatives, Senate, and presidency, it’s still unclear exactly what the details of a student loan forgiveness program would entail, including the amount and timing of forgiveness. If you stop making payments and find out you don’t qualify — or you don’t qualify to get your full balance forgiven — you’ll need to catch up.
Second, missing payments on a loan can damage your credit. What’s more, a late payment will remain on your credit report for seven years, hurting your chances of getting access to financing in the future. Also, if you stop paying long enough, your lender may send your debt to collections, and you may even be sued for payment.
If you have a private student loan or don't qualify for forgiveness right now, you may want to consider refinancing your student loans to ease the financial burden. To see if a refinance fits into your personal finance plans, head to the online marketplace Credible and crunch the numbers. Credible allows you to compare rates and lenders free of charge!
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Which one should I pay off first — federal or private loans?
If you have qualifying federal loans, it’s important to keep making payments, but consider avoiding adding extra payments until you know more about the cancellation proposals. If you have private loans, however, there’s no reason not to work to pay them down as quickly as possible.
One way to potentially save money in the process is to refinance private student loans with a private lender. If you’re eligible, you may be able to get lower interest rates than what you’re currently paying, and you can also make some changes to your repayment term in case you want to pay off the debt faster or reduce your monthly payment.
To start the process, visit an online marketplace like Credible to compare student loan refinancing rates. Also, use an online student loan refinancing calculator to get an idea of how much you can save and what your monthly payment would be on the new loan.
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Just be sure to avoid refinancing federal student loans if they might be eligible for forgiveness. Otherwise, you’ll no longer qualify for that benefit.
The bottom line
While there has been pressure in the Democratic Party to provide some form of student loan forgiveness and also some plans, it’s still uncertain exactly what’s going to happen with student loan forgiveness in 2021.
As a result, it’s crucial that you continue making your monthly payments. However, it may be a good idea to avoid adding extra payments on federal loans that might qualify for cancellation. If you have private loans or ineligible federal loans, take the time to shop around and compare refinancing lenders to see if you can save.
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